I have finally had a chance to read Greg Smith’s letter, “Why I Am Leaving Goldman Sachs”, published as an Op-Ed this past week in the New York Times. In it, Mr. Smith, an executive director of the US equity derivatives business at one of the world’s leading merchant banks, says that he is resigning because, in his view, the culture of the firm has changed significant;ly for the worse since he joined it twelve years ago.

… I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

Mr. Smith says that the culture of the firm has changed, from one which put the customer’s interest first , to one where making the maximum profit for the firm, at the customer’s expense if necessary, has become paramount.

I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them.

Much of the Wall Street reaction to Mr. Smith’s letter has been fairly predictable. He has been pictured as a naive hypocrite, who never understood what the business was about, but was happy enough to deposit his bonus checks. My own reaction, having worked for about thirty years in the financial services industry, is that no one there should be at all surprised by what Greg Smith said. I have no specific knowledge of Goldman Sachs, but the scene he describes sounds all too familiar.

As William Cohan points out in an article in the Washington Post, the idea of Goldman Sachs, or any other investment bank, duping its clients is not exactly new. He cites the example of Goldman’s role in and around the bankruptcy of Penn Central in 1970. Goldman was the underwriter for Penn Central’s commercial paper. Because of its relationship with the firm, Goldman was privy to information about Penn Central’s deteriorating liquidity position, information it did not share with its customers even as it continued to flog the commercial paper. The SEC investigated following Penn Central’s bankruptcy.

According to the SEC, Goldman “gained possession of material adverse information, some from public sources and some from nonpublic sources indicating a continuing deterioration of the financial condition of the [railroad]. Goldman, Sachs did not communicate this information to its commercial paper customers, nor did it undertake a thorough investigation of the company. If Goldman, Sachs had heeded these warnings and undertaken a reevaluation of the company, it would have learned that its condition was substantially worse than had been publicly reported.”

The SEC sued Goldman, and the suit was settled within a short time. Goldman was also sued by some of its customers. Many of these suits were also settled, but some, for whatever reason, were allowed to proceed to a trial, which Goldman lost.

Incredibly, Goldman thought it could win the lawsuits and allowed them to go to trial, where much of the firm’s dirty laundry was aired. In the end, it lost the suit brought by the three companies and paid the plaintiffs 100 cents on the dollar, plus interest.

Cohan argues that, if Greg Smith had been paying attention, he could have figured out that Goldman’s actions did not always match its lofty principles. At one level, it is hard to argue with this. Certainly since I started work in the industry in the mid-1970s, there has never been any shortage of skunks and weasels on Wall Street.

On another level, though, I think Smith is right: the culture of Wall Street has gotten worse, and there are at least some identifiable reasons for this. Once upon a time, firms like Goldman Sachs were partnerships, meaning that the money they were risking belonged to the partners that owned and managed the firm. Now, most of these firms are public companies, whose (very highly paid) managers are risking the stockholders’ money; they have also been permitted to become bank holding companies, with access to lending from the Federal Reserve, meaning they can risk taxpayers’ money, too. The rise of proprietary trading in ever more exotic and opaque financial instruments has made effective oversight more difficult. The bonus system rewards those who produce short-term profits, even when those profits are based on theoretical valuations of long-term transactions. (I’ve written about this before. These are sometimes called “IBG” trades on the floor: “I’ll Be Gone” by the time the deal craters.) It is hard, offhand, to think of a more complete collection of perverse incentives, to say nothing of agency problems and moral hazards.

Really, the only thing surprising about this is that anyone is surprised.